Washington Forest Products began operations on January 1, 2011. On December 31, 2-11, the companys accountant ascertains
Question:
Washington Forest Products began operations on January 1, 2011. On December 31, 2-11, the company’s accountant ascertains that the following amounts should be reported as expenses on the income statement:
Insurance expense $20,000
Supplies expense 11,000
Rent expense 14,000
A review of the company’s cash disbursements indicated that the company made related cash payments during 2011 as follows:
Insurance $29,000
Supplies 27,000
Rent 8,000
a. Explain why the amounts shown as expenses do not equal the cash paid.
b. For each expense account, compute the amount that should be in the related balance sheet account as of December 31, 2011.
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Step by Step Answer:
a With cashbasis accounting cash inflows and outflows are the critical events A company will recognize revenue when it has cash inflows and the company will recognize expenses when it has cash outflows So in this case Washington Forest Products would recognize the following expenses under cashbasis accounting Insurance expense 29000 Supplies expense 27000 Rent expense 8000 With accrualbasis accounting inflows and outflows of assets and liabilities are the critical events That is a company will recognize revenue when it has an inflow of assets or an outflow of liabilities associated with operating activities Similarly the company will recognize expenses when it has an outflow of assets or an inflow of liabilities associated with operating activities Consider the revenues being generated when the company is entitled to cash The company could collect the cash at the exact same time it becomes entitled to the cash which is an asset account the company could expect to collect the cash after it has become entitled to the cash which would give rise to a receivable an asset account or the company could become entitled to cash after it had already collected the cash which would result in the company reducing its unearned revenue a liability account Just as with revenues a company can consume benefits at three different points in time relative to the cash outflow ...View the full answer
